10-23-2017: December Cotton: Hurricane Influence Over-stated

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors


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Our fundamental and technical factors are so closely balanced, that we had to double-weight the news in order to break a tie. Cotton is in a narrow trading range. However, there is a definite "cost of production" that regulates how low most commodities can go, and we are near or at it. Cotton recently got a boost from anticipated damage to crops from hurricanes in areas where most of the cotton is grown in thie U.S. However, damage was not as severe as anticipated, and competition from Australia and India where bumper crops are anticipated put a lid on cotton prices. Disappointment over the hurricane effects on burgeoning supply in storage seemed to set cotton on a current downward course where it may remained "pressured" to issue only minor counter upswings.

Intermarket Analysis

We fed Cotton, Soybeans, and Corn into a neural network to get the following result:

Parabolic Chart

December Cotton:

Parabolic Chart

Nirvana Chart

December Cotton:

Initial Chart

News Analysis

The largest cotton harvest in 12 years is in progress, especially in Texas, where there are no rains forecast for West Texas, but rains in the Delta and Southeast. Cotton deliverable certified warehouse stocks dropped to 3,586 bales from 4,465 and 6.584 bales in the previous three sessions. Weekly export sales were strong at 253,200 bales for the current marketing year and 8,800 for the next marketing year. At October 12th, cumulative cotton sales stood at 48.0% of the USDA forecast for 2017/28 (current) year, versus a 5-year average of 49.1%. Other exporters excluding the U.S. are expected to see ending sotcks jump 5.23 miollion bales for the 2017/18 season, and that jump is a negative force for cotton prices. Ending stocks this year for the U.S. are expected to reach a 9-year high up more than 3 million bales from last year and this adds to a bearish tone as the U.S. harvest picks up. Georgia is still wet delaying harvest there.

Hurricane damage to cotton crops have been cited as a major wild card, along with increased potential for Chinese imports from the U.S. The USDA cut its forecast for domestic cotton harvest by 643,000 bales largely in Texas and Georgia, the two top producing states. Hurrincanes Harvey and Irma were responsible for the downgrade. The U.S. cotton yield estimate was downgraded by 19 pounds per acre to 889 pounds per acre, below the current record of 892 pounds per acre recorded in 2012.

Export estimates were reduced as well. Shipments from Australia were raised by 300,000 bales to 4.10 million bales, citing "robust early-season" trade. Also, the forecast for India, the second-ranked shipper after the U.S. was lifted by 400,000 bales toi 4.60 million bales. Large domestic production alongside nearby demand was cited as the reason for India's export increases.

The USDA kept its forecast for Chinese imports at 5.10 million bales, despite acknowledging market talk that the country may be poised to loosen import restrictions as it tries to run down state inventories. The USDA saw no change in China's import policy to follow despite rumors.

Rabobank is bearish on cotton. It curtailed its estimates for the "worst case scenario" of crop damage from hurricanes, leaving its harvest forecast at 21 million bales. It thinks USDA export estimates are too optimistic based upon competition from India.

Commerzbank points out Australian cotton exports are by far the lion's share of its cotton, and makes the country one of the biggest cotton suppliers on the world market. It cited a downgrade by Abares, the officlal Australian commodities bureau, of 583,000 bales (127,000 tonnes) to 4.39 million bales for the country's cotton exports in 2017-18. With U.S. and Australian supplies weaker, the 11.9 million bale bhild in world cotton inventories outside China that the USDA forecast in September could therefore turn out to be somewhat smaller. Abares forecast world cotton prices at 80.0 cents per pound. This is way above the International Cotton Advisory (Committee located in Washington, D.C.) forecast of 69 cents per pound.

Traders of ICE futures gave little attention to a strong turnaround in U.S. export business for the week ending September 143th. The market was trading well below a level where significant demand for U.S. bales for export has recently been, and flirting with a level that had previously shown a significant amount of mill on-call sales fixations. Domestically the balance of the cotton crop is expected to enjoy weather conditions favorable for harvest, including hot temperatures across many areas. China has offloaded more than 14 million bales of its massive reserve stockpile over the last several months, moving into what is scheduled to be the final week of auction sales for 2017.

The Dept. of Agriculture's Commodity Credit Corporation announced a special import quota for upland cotton that permits importation of a quantity of upland cotton equal to one week's domestic mill use. The quoita will be established on October 26th, 2017, allowing importation of 58,805 bales of upland cotton.

Assessing cotton news, cotton prices rebounded on the idea of stronger demand and significant questions with respect to the size of both U.S. and foreign crops. Current weather efdfects are dwarfing any effects of Hurricanes Harvey and Irma in significance at harvest time. Generally hurricane effects had been way over-estimated. Countries that have the high quality cotton will be able to meet the quality requirements due to a shortage in U.S. high qualities. The cotton market may now be in equilibrium heading into 2018. The longstanding trading range of 65-70 is likely to continue with the possibility of slight bleeding on either end. A combination of supply fundamentals will keep a 70-cent lid on cotton prices and continue to push prices lower. The supply side of cotton is dominated by excessive stocks. The Chinese auction program has been very effective in stablilizing world cotton prices.

Point & Figure Chart

 89.0I                                                                  T 10/20
     I ICE - Dec-17 Cotton #2, 50000 lbs, c/lb.    Cm.=0.06  Lim.= 3.3     I
     I X
     I XO
     I XOXO                              X
     I XOXO                              XO
     I XO O                              XO
     I X  OX                             XO
     I X  OXO                            XO
     I X  OXO                            XO
     IO   O O                      X   X XO
     I      O                      XO  XOXO
     I      O                      XO  XO O  XO
     I      O                      XO  X  O  XO
     I      O                      XO  X  O  XO
     I      O                      XOX X  OX XO
     I      O                      XOXOX  OXOXO
     I      O                      XOXOX  O O O
     I      O                      XOXO
     I      OX     X   X X         XO
     I      OXO    XOXOXOXOXO    XOX
     I      OXOX   XOXOXO OXO    XOX
     I      OXOXO  XOXO   OXOX X XOX
     I      O OXOX XOX    O OXOXOXO
     I          OXOX        O O OX
     I          OXOX            OX
     I          O O             OX
     I                          O
      1        111           111       1
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Pattern." It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Cotton (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $500. Initial margin on a single contract is $3,036. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a downtrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Cotton May 69 Call and Sell (1) May 67 Call @ 0.93 to the sell side or better.

o 1 o 2 o 3 0 4 o 5

Calendar Spread

What the Dec. - Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at +0.60 or narrower buying far as prices are rising and then selling the near, and exiting or entering when it is at -1.30 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the sell the far, buy the near point.

Level Table:

Level Table

The path of least resistance is down.
 85.0|                                                                  R 10/20
 ICE - Dec-17 Cotton #2, 50000 lbs, c/lb.    Cm.=0.06  Lim.= 3.3
     |RRTT   <<<
 65.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.082
       1 1 1 1 1                                       1 1           1
       0 1 1 2 2 1 1 2 2 3 3 3 4 5 5 5 6 6 7 7 8 8 9 9 0 0           0
       2 0 1 0 1 0 1 0 1 0 1 3 1 0 1 3 1 2 1 2 0 2 0 2 0 1           2
       4 4 8 5 9 4 9 2 6 3 7 1 7 1 5 0 3 7 2 6 9 3 7 1 5 9           0

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 10/20 ).

Intraday Chart

                 Risk Versus Opportunity Report

                    CTZ7    December Cotton

                      High Price:  68.67
                   Current Price:  66.88
                       Low Price:  63.25

                            Risk: -0.054
                     Opportunity: -0.110

                    (O/R) Ratio =  2.028

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart - 1
News - 2
Point & Figure + 1
Cyclicals + 1
Seasonals + 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility - 1
Level Table - 1
Other Factors - 1
Total - 1
Place 4 December Cotton on a Sell Watch with stoploss @ +2.57 above the get-in point when recent price is represented as "66.84".